The ABCs of Real Estate: Real Estate Terms Every Buyer And Seller Needs To Know

BuyerSeller

April 19, 2018

Whether you are a first-time home buyer or a third-time home seller, the real estate transaction can be confusing and stressful enough even without the many terms and acronyms used during the process. But don’t be overwhelmed — we’ve compiled a mini-glossary of the important terms you should know and familiarize yourself with to help you better understand what’s going on with the home sale.

It’s good to remember what Steve Jobs said: “There’s always one more thing to learn.”

The ABCs of Real Estate

A: Anappraisalis a professional estimate of the value of the property by a certified appraiser. Lenders always require a home appraisal before they will issue a mortgage. Appraisers look into similar homes in the area that have been sold recently, also known as “comps,” and also take into account the home’s condition, square footage, location, and quality to make an accurate assessment of how much the home is worth. There are many myths surrounding the home appraisal that buyers and sellers should be aware of to better understand this valuable process.

B: A backup offer is a secondary offer on a home that is under contract between the first buyer and the seller. It becomes active when the primary sale falls through due to a number of reasons. A backup offer can be a useful tool to keep a buyer motivated to get the home that he/she wants.

C: Acontingencyin a real estate contract is anything that puts a condition on the buyer’s willingness to proceed with the purchase. Some of the most common contingencies include the financing contingency, inspection, sale, title, and appraisal contingency. A buyer will typically reserve the right to recover her earnest money if the contingency is not satisfied.

D: Down payment is the amount of money a home buyer pays directly to a seller and ranges between zero to 20 percent of the home’s purchase price, depending on the type of the loan. In the 2018 NAR Aspiring Home Buyers Profile, many home buyers have indicated that the most difficult step in the home buying process is saving for a down payment. However, there are popular loan assistance programs that can help buyers afford a mortgage, including the FHA loan, where buyers can get a mortgage with as low as 3.5 percent down payment. Likewise, the VA and USDA loans require no down payment at all for eligible home buyers.

Bonus: TheDebt-to-income ratio (DTI)is a personal finance measure that compares an individual’s debt payment to his or her overall income. A low debt-to-income ratio demonstrates a good balance between debt and income. Borrowers who have lower DTIs are more likely to successfully manage monthly debt payments. Reducing your debt-to-income ratio can help improve your credit score, which lenders will evaluate when you’re applying for a mortgage loan.

E: Escrowis a term for a neutral third party that handles the exchange of money and documents (purchase agreement, deed, loan documents, etc.) in compliance with the Purchase and Sale Agreement and any escrow instructions. Escrow handles the transfer of the buyer's loan documents and property taxes and works with a buyer's lender and real estate agent to make sure the title of the home is clear of liens before the transfer of ownership.

Bonus: TheEarnest Money Depositis the money a buyer pays soon after a home seller has accepted his/her offer on a home, and is different from a down payment. Once the sale of the home has been completed, the earnest money the buyer paid will be applied toward the closing costs. If the buyer backs out of the sale due to a failed contingency, he/she can recover the earnest money in full. However, if the buyer backs out of the sale for reasons not covered by contingencies, he/she will forfeit the earnest money.

F: Foreclosureis a process that transfers the right of home ownership from the owner to the bank or lender after the owner defaults on his loan.

Bonus:For-Sale-By-Owner, more commonly known as FSBO (pronounced “fizbo”), is used to describe a homeowner who is selling their property without the help or representation of a real estate agent. FSBOs remain at an all-time low of 8 percent, according to the NAR 2017 Profile of Home Buyers and Sellers. At least 89 percent of home sellers continue to work with real estate agents to sell their homes.

G: The GreatSchools Rating byGreatSchools.orgprovides essential information to parents so they can choose the right school for their family. Since proximity to good schools is a major factor especially for buyers with children and young families, the GreatSchools Rating is a helpful tool for parents in evaluating the schools and school district they’re considering.

H: Homeowners’ Association (HOA) is a nonprofit organization that manages a shared housing complex, including condos and other planned developments. The HOA provides funding for repairs, grounds maintenance, and security by collecting money from homeowners. It also creates and enforces rules for the properties.

I: An inspection, or typically known as a home inspection, is a thorough investigation of a property’s condition by a licensed inspector. It is the home inspector’s job to assess the condition of the property and look for any flaws that need to be fixed, even if a house looks like it’s in great condition.

J: A jumbo loan orjumbo mortgageis a loan whose principal value exceeds the standard limits for Fannie Mae or Freddie Mac, the two government-sponsored enterprises that buy loans from banks. This type of loan is available for borrowers who do not qualify for a conforming loan and is commonly used for luxury homes.

K: Key raterefers to the specific interest rate that determines bank lending rates and the cost of credit for borrowers. In the US, the two key interest rates are the discount rate and the Federal Funds rate.

L: List Price is the price of a home for sale set by the seller and his/her listing agent. Real estate agents help set the price of the home right by doing a Comparative Market Analysis (CMA) to provide an accurate home valuation. Setting up a correct list price won’t turn off potential buyers and increases the chances of the home getting sold.

M: TheMultiple Listing Service (MLS) is a suite of around 700 regional databases, wherein each regional MLS has its own listings. Agents pay dues to access and post homes on each one, and they may become a member of more than one MLS if they want to have a broader reach for their clients. Only licensed real estate agents and brokers can list homes for sale on the MLS.

N: Net Proceedsis the amount of money a seller takes away from selling a home, after taking into account the agent commissions and closing costs.

O: Open House is an event where a house or property is open for viewing to potential buyers for a scheduled period of time. Many open houses occur on weekends, especially on Sundays.

P: Apre-approvalis an evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan. During the process, a lender will evaluate the income and expenses of the borrower, including taking a thorough look at the borrower’s credit report and score. Getting a mortgage pre-approval is the first step serious first-time home buyers should do before they even go house-hunting. It will provide buyers a crucial guideline of what loan they can get, how much they can afford and how much the bank will lend them.

Q: Aquitclaim deedis a legal document that transfers ownership of a home from one party to another, but does not give any guarantee as to what is being transferred. It simply transfers whatever interest the homeowner has in the property to his/her recipient. For an instance, a quitclaim deed can be used by a divorcing couple if the husband needs to transfer their jointly-owned property entirely to his wife.

R: Areal estate agentis an individual who is licensed to negotiate and arrange real estate sales; including showing property, listing property, filling in contracts, listing agreements, and purchase contracts. Real estate agents are generally licensed to operate under the supervision of a real estate broker. In the NAR 2017 Profile of Home Buyers and Sellers, at least 89 percent of home sellers worked with a realtor to sell their home, while 87 percent of buyers purchased their home through a real estate agent. Especially for first-time home buyers, hiring a great real estate agent can help you save time and resources on your journey to purchasing your dream home.

S: Ashort salehappens when an owner is selling their home for less than the mortgage they owe on it. The lenders may agree to take a “short” on the mortgage to release it for sale. A short sale is typically seen as the last step before a foreclosure. It often happens after a low appraisal or a decline in property values.

T: Titleis the right to ownership of a specific real estate property. Once the transaction closes, the buyer will receive a final title policy recording their names as the new legal owners, along with the amount of title insurance. The most common methods of holding title in real estate are the joint tenancy, tenancy in common, and sole ownership.

U: Upfront Costs refers to all the costs a buyer pays once his/her offer on a home has been accepted, including earnest money, the inspection fee, and the appraisal fee.

V: The Veterans Affairs (VA) home loans are unique mortgage options for current and former members of the military, offered by the U.S. Department of Veterans Affairs. Veterans, active-duty service personnel, select Reservists or National Guard members, as well as spouses of military members who died while on active duty, are among those who can qualify for this loan. The VA provides a home loan guaranty benefit and other housing-related programs to help them become homeowners.

W: Walkthrough refers to the final inspection of a home before closing. Buyers should complete a final walkthrough with their real estate agent to make sure any agreement to make repairs on the property have been fulfilled before the closing papers are signed.

X: Xeriscapingis a creative and sustainable landscaping that conserves water and is based on sound horticultural practices. The process was originally developed for drought-affected areas and is best for areas with water restrictions. In xeriscaping, the need for maintenance is minimal and water requirements are low. The practice relies on using local plants accustomed to the climate and getting the most out of everything you plant. Homeowners can lessen the impact on their local environment by creating this type of sustainable landscape. A good xeriscape can also raise property values more than extensive landscaping.

Y: Ayield spread premium (YSP) is the compensation a lender pays a mortgage broker to sell a loan with a higher interest rate. The YSP is listed on the loan estimate and Closing Disclosure.

Z: Azero-lot-line propertyis a building that comes to the very edge of the property line on at least one side. Units may be attached to one another in a zero-lot-line housing development, leaving no room for a yard. Many townhouse developments are built on zero-lot-lines.